Question

1. What is the difference between the Euronote market and the Eurocommercial paper market?

2. Retail Manufacturing of NYC, borrows $2,500,000 at LIBOR plus a lending margin of 1.15 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is 3 ½ percent over the first six-month interval and 4 3/8 percent over the second six-month interval, how much will Grecian Tile pay in interest over the first year of its Eurodollar loan?

You will use the provided information to Calculate the paid interest over the first year of its Eurodollar loan.

Formula is provided as follows:

Please provide the brief interpretation to support your calculation.

Formula: LIBOR x (LIBOR IR + Lending Margin)/2 + LIBOR x (Interval interest + lending margin) /2

Answer 1

1. Euro notes

Euro notes are short term bonds which can be directly sold to the investors by a borrower (corporations and governments). These notes may or may not have the underwriting support of the commercial banks. Underwriting by the banks means that the borrower will get the money either from the investors (if investors are interested in purchasing the notes) or from the underwriting bank (underwriting means that the entire issue will be first bought by the underwriting bank for further selling to investors).  'Euro' indicates that the notes are issued outside the country in whose currency they are denominated.

Eurocommercial paper (ECP) is another short term financial instrument for the non-bank borrowers. ECPs are not underwritten by any bank and the borrower (issuer) generally has high credentials, else most investors will ignore the paper issue. They are usually issued at a discount to face-value and quoted in the secondary market on a yield basis.